He was respected among his peers, well read, and filled with high thoughts encouraged by the philosophy he studied. He was honest, kind, and patriotic. In short, he was a good man—but he was also a man that killed his friend.
On the steps of the Senate that had functioned as the governing body of Rome for hundreds of years without the need for a king lay the body of a man that had claimed rights to that position of power. It was Brutus’ family that had assassinated the last man to serve as king four centuries earlier and it was Brutus that successfully conspired to kill his friend, and emperor, Julius Caesar.
But, Shakespeare’s Julius Caesar isn’t really about the title character or his death. Like many other of Shakespeare’s twelve tragedies, it is about the flaws of men and governments. More specifically, it is about the fatal flaw that simultaneously permits them to reach their fullest potential while cultivating their deadliest sin leading to their downfall when taken to the extreme.
As for Brutus—with all of his noble traits and learnedness, his great fault was assuming it was his obligation to be interfering with things that he did not fully understand.
Simply put, a tragic flaw can sometimes lead to the very thing it was intended to prevent. And in this regard it is one of the reasons Julius Caesar came to mind as I was thinking of student housing.
It is often said the Harrisonburg metro has an overabundance of student housing. I would like to suggest we don’t have nearly enough student housing or market rate apartments. At the very least, there isn’t enough to reach the often-cited objectives of preventing either from contributing to sprawl or keeping older projects from falling into a state of disrepair. I believe the solution to both issues, and several others ranging from transportation to public services demand, is very simple—zone more land for high-density housing as a by right use.
As it currently stands, the amount of land zoned for high-density housing development is virtually non-existent and intentionally so. This type of housing, like other sorts of intensive development, places demands on a community’s infrastructure, and municipalities often feel the best way to control this growth is to limit the supply. Another term for this is artificial scarcity. Remember this term, because it plays a key part in our story. Meanwhile, the demand from student housing developers in the market is extremely high as they seek to deliver the layouts and amenities their consumers (students and parents of students) desire and for which they are willing to pay.
Without question, student-housing developers have successfully rezoned some land for new complexes. Aspen Heights is the most recent example of a finished product and a couple others are currently under consideration. While they’re not always popular with the general public (even though they are relatively low cost sources of tax revenue), these new units have proven to be appealing to students and illustrated by the fact that students have overwhelmingly shifted to them. As a result, owners of older units have been forced to reduce prices to continue to attract students to an inferior product.
With reduced rents, the amount of capital available for repairs and refurbishment is limited. This older product, which quite often is extremely well located, doesn’t justify additional investment and sometimes falls into a state of disrepair. This type of blight is exactly what the governing bodies feared.
So often the response is, “Why should we zone for more high-density housing when we have student-housing falling down in our community?” Perhaps the fatal flaw in that question is that it is only for of the lack of high-density residential zoning, the creation of this artificial scarcity, that we have units in a state of disrepair.
The effort to suppress supply has created an environment in which older student housing fills the gaps in the market beyond its original intent. Sometimes it’s the student that can’t afford the higher rents offered at the newest developments and other times it’s a small family or lower income individual. In any case, it fills a need, but also serves to put a floor on where rents bottom out. In effect, artificial scarcity has resulted in reverse rent control, which serves as further disincentive for investment creating the potential for perpetual blight in many cases in the current environment.
Even with below market rates, the rents collected are generally high enough to prevent redevelopment. As an example, assume there is a 100-unit complex on nine acres generating only $400 per month per unit on average. This equals $480,000 of revenue collected annually. For the sake of simplicity, let’s assume operating expenses are slightly higher than normal and are 40% of total revenue collected leaving a net operating income of $288,000. Assuming a generous cap rate of 9.5% creates a value just north of $3 million or $336,000 per acre. If this math didn’t make one bit of sense to you—just know this price is nearly double the market rate for high-density residential land before demolition of the building and site work are taken into consideration. In short–the rents in place would never permit a valuation that supports demolition and redevelopment in the locations often best suited for student housing development.
In other words, it is my position that inhibiting competition through artificial scarcity has led to the very thing it was intended to prevent. A different approach to high-density housing development may not only result in more choices for consumers of these products, but the increased supply would also eliminate the high rent floor. Without these artificially inflated rents or occupancy rates, blighted properties would be forced to more accurately reflect their actual value in the market allowing redevelopment to take place as the market demands it in the locations that make the most sense.
Let me finish by saying this is simply a theory and not a statement of fact. I don’t wish to be the Brutus in this conversation and certainly don’t intend to die in a bloody battle for this belief. Admittedly, there are many aspects of the student housing discussion to which I am not privy and have no desire to be meddling in. That said, I do think this notion is grounded firmly in basic economic principle and hope that it will be accepted as it was intended, which is nothing more than a contribution for further conversation.
Tim Reamer provides commercial real estate brokerage and consulting services with Cottonwood Commercial and specializes in retail representation, investment property (multifamily | commercial | NNN), and development projects. Learn more at www.timreamer.com.